European vs US Pricing Approaches Several Comparisons

1. European vs US Pricing ApproachesSeveral Comparisons European vs US Pricing Approaches Several Comparisons CARe 2007 - I. Mashitz

2. European vs US Pricing ApproachesSeveral Comparisons European Questions on the Reliability of ISO/NCCI Data for Reinsurers Alternative Trend Procedure European ILF Method European Critique: Free Cover Issue

3. European vs US Pricing ApproachesSeveral Comparisons European Questions on the Reliability of ISO/NCCI Data for Reinsurers

4. Applicability of ISO/NCCI Data for Reinsurance Layers • Focus on primary layers • Lack of Data in Umbrella layers • Assumption of uniform loss trend by SOL • Functional form of the Mixed Exponential

5. Data Anomalies in ISO/NCCI Data • Indemnity trend higher than medical trend • Unexplained large trend movements one year to next • Unexplained large movement in layer loss cost one year to next

6. European vs US Pricing ApproachesSeveral Comparisons Alternative Trend Procedures

7. Alternative Trend ProcedureDefinition of Methodology • Define a small set of severe bodily injury claims that normally pierce a reinsurance layer • Specify age of claimant, marital status, number of children, salary, etc. • Specify other claim characteristics • Evaluate these claims each year

8. Alternative Trend ProcedureIllustrative List of Claims • Permanent Partial • Quadriplegic • Fatality

9. Alternative Trend ProcedureAdvantages • Only reinsurance layer claims considered • Drivers of loss trends well understood • Severity trend not affected by frequency trend • Applicable in absence of bureau information • Allows for jurisdictional differences

10. Alternative Trend ProcedureDisadvantages • Somewhat dependent on subjective judgment • Relies heavily on expertise of practitioners • Small and incomplete sample • Severity trend model only

11. European vs US Pricing ApproachesSeveral Comparisons European ILF Method

12. European ILF MethodDefinition 1 + ILF represents the constant ratio of expected loss as you double the limit

13. European ILF MethodExample ILF = .30 Assume first million ground up Expected loss = $1,000,000 The 1 XS 1 layer EL = .30 X $1,000,000 = $300,000 The 2 XS 2 layer EL = .30 X $1,300,000 = $390,000 The 4 XS 4 layer EL = .30 X $1,690,000 + $507,000

14. European ILF MethodComparison The European assumption is more severe than the US ISO curves and is equivalent to a single parameter pareto with alpha less than 1. alpha = 1 – LN(1+ILF)/LN(2) ILFalpha .1 .86 .2 .74 .25 .68 .3 .62 .4 .51

15. European ILF MethodApplication The Underwriter will choose from a range of ILFs based on his/her experience and exposure assessment of the severity of risk insured

16. European vs US Pricing ApproachesSeveral Comparisons European Critique:Free Cover IssueTwo Issues

17. European Critique:Free Cover IssueTwo Issues A. Unexposed cover – i.e., limit larger than largest loss B. Unobserved losses – i.e., coverage for which no losses yet exist

18. European Critique:Free Cover IssueSimple Method Add “x” points “x” selected based on underwriter’s assessment of exposure

19. European Critique:Free Cover Issue“Slightly” sophisticated approach – issue “A” • Develop a limited mean loss ratio • Use a severity distribution to build to unlimited loss ratio • Select a CV and form of aggregate distribution